Can someone explain why NI is the same under these 3 methods? especially when there is minority interest (ie: share of ownership is less than 100%). Equity will not be the same; it is higher under Full goodwill method if the share of ownership is less than 100%. But how is NI the same? Thanks guys
Equity method: Proportionate % of investee’s NI recorded as additional income. Proportionate consolidation: Proportionate % of revenues and expenses recorded on IS. Full consolidation: 100% of revenues and expenses recorded on IS. Minority interest % net income subtracted to arrive at consolidated NI figure.
thanks bpdulog; but that does not prove the fact that NI is the same under equity method and full/partial consolidation. anyone else has an insight?
NI = revenue - expenses All 3 methods mentioned by bpdulog, whenever the owner’s revenue consolidates some amount from its subsidiary, owner’s expense will increase the related stake of its subsidiary as well. NI is calc the whole impact of these two parts so NI remains the same. IF NI is different, it means company can generate gains if they continue to buy other companies, which is not reasonable.
intelo Wrote: ------------------------------------------------------- > thanks bpdulog; but that does not prove the fact > that NI is the same under equity method and > full/partial consolidation. anyone else has an > insight? Quantitative example: Company A owns 80% of Company B. Company B NI = 20 Company B Revenue = 100 Company B Expenses = 80 Equity Method: 20*.80 = 16 in additional net income. Partial Consolidation: Revenues = .80*100 = 80 Revenues = .80*80 = 64 Additional NI generated from Company B = 16. Full Consolidation: Revenues = 100 Expenses = 80 Additional NI = 20 Minority share NI = .20*20 = 4 Additional NI generated from Company B = 16.
Yea I think I get now. The adjustment of minority interest makes the whole thing work in the end. bpdulog, the partial goodwill number are not correct. They should be the exact same numbers as the Full consolidation method. (see CFAI on page 46). Even though its called partial consolidation method, it is still a full consolidation of accounts. what you have described for partial is what would be used for proportionate consolidation.
intelo Wrote: ------------------------------------------------------- > Yea I think I get now. The adjustment of minority > interest makes the whole thing work in the end. > > bpdulog, the partial goodwill number are not > correct. They should be the exact same numbers as > the Full consolidation method. (see CFAI on page > 46). Even though its called partial consolidation > method, it is still a full consolidation of > accounts. what you have described for partial is > what would be used for proportionate > consolidation. Eh? I meant proportionate consolidation, it was a typo. My bad.
Is it just me or are stress levels going through the roof on this forum? :S